MVP is arguably the worst buzzword in entrepreneurship today.
- It is not a “product”.
- Nobody can explain what “viable” means.
- Nobody can explain what “minimum” means.
We hear it every semester – students jumping right to an idea of a completely functional app, or video game, or restaurant / bar. To one day achieve that dream, students need to first understand what is the first Minimum Viable Product (MVP) they should build.
In this exercise, students will design their first MVP by identifying their riskiest business model assumption. They’ll then design the simplest experiment they can to test that riskiest assumption.
Specifically, students will learn:
- What is an MVP?
- What is the Riskiest (Business Model) Assumption?
- How to identify their Riskiest Assumption
- How to design a test using their first MVP
Before they sink the resources necessary to build that app, or that video game, or open that restaurant / bar, they will understand how to iterate through quick tests to make sure they build a product customers actually want.
What are MVPs?
Provide students this definition of an MVP:
A version of a new product which allows a team to collect the maximum amount of validated learning about customers, with the least effort. – Frank Robinson
The goal here is to emphasize the 4 major components of the definition:
- Collect the maximum amount
- Of validated learning
- About customers
- With the least effort
Walk students through the components one-by-one:
- #2 (validated learning) means to run an experiment to validate a hypothesis
- #3 (about customers) means that when they run experiments, students need to focus those experiments on their customer/business model (not solely on product)
- For #4 (with the least effort), ask students “Why would it be important for entrepreneurs to run experiments with the least effort possible?”
Answer: to save resources (e.g. time/money), in the event their hypotheses are wrong. That way they can maximize the number of business model iterations they can make.
After this discussion, re-phrase the definition of MVP as:
The easiest way to test your most important business model hypothesis.
Once your students understand the concept of an MVP, the next step is to identify the most important business model hypothesis!
Ask your students to fill in the blank:
A chain is only as strong as its ___________ link.
In that way, the “weakest” link of a chain is the most important in the chain; it will determine whether or not the chain fails.
Ask students to consider each of the components of the Business Model Canvas as links in a chain. How would they decide which component, or link, is the most important to test?
The component they should test is the one that is most likely to lead to their business model’s failure.
Tell students that there’s a special name for the component of their business model that is most likely to lead to its failure. We call this the “Riskiest Assumption.”
The riskiest assumption is always the most important to test with an MVP.
Students often ask about testing multiple hypotheses (assumptions) at once. Make a strong point that if they tested multiple hypotheses at once, they would find it very difficult to discern which hypothesis they invalidated if a particular experiment fails. In other words, by focusing one one hypothesis at a time, they can be certain whether
For example, if a company were to test their pricing, channel and value proposition assumptions at the same time and the experiment failed to generate the number of sales they expected, it wouldn’t be clear which of the three assumptions was to blame (e.g. wrong channel, wrong value proposition, or wrong price). In this scenario, they would be no closer to building product customers want!
Given the necessity of focusing on the riskiest assumption, if we go back to the definition of an MVP once again, we get the following:
The Minimum Viable Product is the easiest way to test your riskiest business model assumption.
The next step, is for your students to identify their riskiest assumptions.
Finding the Riskiest Assumption
In order to identify their riskiest assumption, students need to rate all of their Business Model Canvas (BMC) components in terms of risk.
To do that, they’ll need to consider two characteristics for each component:
- How critical is that hypothesis to the success of their business model?
- How confident is the students that hypothesis is valid?
Students can evaluate the components using the Riskiest Assumption Matrix.
Students will map each BMC component into one of the four quadrants of the matrix:
- Lower-Left: Less Critical + Low Confidence. Assumptions that students have little data on but will not drastically affect the success of their business model.
- Lower-Right: Less Critical + High Confidence. Assumptions that have plenty of supporting data but will not greatly impact their business model.
- Top-Right: Highly Critical + High Confidence. Business model assumptions that could significantly impact the business model that have been validated.
- Top-Left: Highly Critical + Low Confidence. Business model assumptions that could significantly impact the business model that have yet to be validated.
The assumptions in this top-left quadrant are the riskiest to the overall business model and students should test first with their MVPs. The closer to the top-left corner of the chart, the more risky the assumption.
Walk students through scoring, and plotting, the components from their BMC by using Customer Segments as an example. Ask students to rate their “Customer Segments” (CS) assumptions based on two criteria, both on a scale from 0 to 10:
- How critical is this assumption to the success of their BMC? (0 = not at all critical. 10 = extremely critical)
“Critical” here is defined as, “If these hypotheses were proven false, how likely would that lead to the collapse of the overall business model?”
As they think about their score, tell students that while the customer segments component of their business model will always be critical to their business model’s success, meaning it should get a relatively high score, for some business models the CS component is more critical than others.
For example, if a student has several distinct, but highly related customer segments with similar problems (e.g. they can serve dog owners, cat owners, ferret owners, etc.), they might be able to quickly pivot their CS hypothesis if their current assumption gets invalidated. In that way, they may score their CS component as slightly less critical (e.g. 7 – 8) than a business model with a single unique CS (e.g. CIOs for federal agencies) that is more difficult to pivot without changing the entire business model.
Note: the actual scores don’t matter at all so you can tell students to just give them a “gut feel” number. What matters most is how they score the components relative to one another.
Once students have written in their critical score, ask them to score…
- How confident are they that their CS assumptions are valid? (0 = not at all confident. 10 = extremely confident).
Their Confidence levels should correspond with how much evidence students have that their hypothesis is valid.
As students conduct customer interviews they should develop a moderate to high level of confidence this is the right customer segment for them to solve a problem for.
Ask students to write in their confidence scores for their CS component.
Once they write down their scores, students should plot the Customer Segments component on their Riskiest Assumption Matrix by putting a dot at the appropriate point on the chart, and labeling it with the letters “CS” above the point.
Students need to map all their BMC hypotheses onto the Riskiest Assumption Matrix. Provide them the following guidance to help students calibrate their risks:
- Value Proposition: highly critical, medium confidence. Arguably the most important set of assumptions in the BMC (i.e. highly critical).
- Customer Relationships: less critical, any confidence. Relationship models can often be altered as necessary to meet the demands of customers.
- Channels: highly critical, low confidence. Students won’t be able to sell a solution to customer problems unless they have a means of reaching their customers.
- Revenue Streams: highly critical, low confidence. Students won’t be able to build sustainable businesses without revenue streams.
- Cost Structure: moderately critical, medium confidence. Costs are important because they have a direct impact on the financial sustainability of a business model, but costs can often be optimized and reduced over time, moderating the critical nature of these assumptions. Students should be able to collect at least a little validating data on the costs they will incur solving the problem they want to solve.
- Key Resources: less critical, medium confidence. Key resources are typically assets the student already has access to, or will need to get access to in order to fulfill their value proposition. These are often less risky assumptions because the same activities can be delivered with different resources, if the originally assumed resources are not available. These assumptions typically have medium confidence because the student already knows if they have some of the resources they require.
- Key Activities: moderately critical, low to medium confidence. Key activities, while pivotal to fulfilling the value proposition, are often flexible as there are a number of ways to solve any given problem, making these assumptions less critical. These assumptions may be well known, but can also be significantly influenced by the revenue streams (high revenue streams can often lead to more quality-oriented key activities).
- Key Partners: low to moderately critical, low confidence. Key partners represent the external organizations that help deliver on the value proposition. Sometimes they are required, often alternatives can be utilized to deliver their portion of the value proposition if some key partner assumptions are incorrect.
Once students plot their BMC components on their matrix, ask them to identify their riskiest assumptions by locating the dot that is closest to the top-left corner of the canvas.
Students should identify either their Channel or Revenue Stream hypotheses as their most risky. If they don’t, discuss with them and the rest of the class why they should re-evaluate the risk.
Many students will identify that their Value Proposition assumption is their riskiest. Convey that they, like all humans, are incredible problem solvers and that if there’s enough demand to solve a problem (as demonstrated by revenue), you’re convinced they will find a solution to the problem by learning a new skill, or using all the money they get from customers to hire the right people to solve the problem. This confidence should cause the Value Proposition assumption to be less risky than the Channel or Revenue Stream hypotheses, for which they should have very low confidence.
Tell students it’s almost always harder to get people to pay to solve a problem than it is to solve it. Even with a cure for cancer, they would have to navigate the channels and revenue streams required to monetize pharmaceutical treatments.
Next, your students will learn how to develop MVPs to test their riskiest hypothesis. To start, they’ll brainstorm potential MVPs for a hypothetical riskiest assumption that you give them. It is helpful to show students a few real example MVPs:
- Dropbox’s “Demo” video was a combination of working code and video editing magic of features they would eventually implement if they validated their riskiest assumption – that enough people cared about the problem to make it worth solving.
- Airbnb launched an MVP to test demand for rooms to stay at during conferences. One of their earliest MVPs was testing demand for their site at SXSW.
Channel Testing MVPs
Give your students the following scenario:
Let’s say you’ve spoken with working parents and the biggest problem they are trying to solve is that when their kids get sick, it’s stressful because getting their children care takes too long, and the parent loses their entire work day.
You’ve identified that channels are your riskiest assumptions. In particular you’re not sure if you can get enough people to click on your Facebook ads to meet your financial projections (annual reach of 45,000-people with a 5% click through rate (CTR)).
Then ask your students: What MVPs could you create to test these channel assumptions?
Remind students that an MVP is, “The easiest way to test their riskiest business model assumption.”
Discuss students’ answers, eventually letting them know that the easiest way to test this assumption would be to create a simple Facebook text ad targeted at working parents to measure how many people click on the ad.
Revenue Stream MVPs
Alternatively, propose to your students that:
You’ve identified that your riskiest assumption is your revenue stream. In particular that working parents will pay $199/month for access to 3 in-home pediatrician visits each year.
Ask your students what MVP could be created in this case?
Pre-Orders: Create a site that collects pre-orders from prospective working parents. The site should mention the price and ideally require a credit card to play the pre-order, but the credit card shouldn’t be charged until the founders are confident they can deliver on their value proposition.
Letters of Intent (LOIs): Collect Letters of Intent (LOIs) – signed, non-binding, documents indicating that the prospective customers will agree to using this service at a given price point.
While LOIs are typically used in business-to-business (B2B) scenarios, you can use this example as a way to introduce LOIs by explaining that they are non-legally binding documents that state a person/organization “intends” to take an action (e.g. buy your product once you build it). While LOIs don’t provide as much validation (i.e. increased confidence) as much as actual sales, an LOI still requires signatures and approval from stakeholders within an organization, which provides much more validation than a simple verbal agreement.
Tell students that asking their customers to sign LOIs is a great way to test their Revenue Stream assumptions if they are selling to other businesses.
With these examples in mind, and having previously identified their riskiest assumption, ask students to brainstorm their first MVP. Once they have an idea, ask a few students to present:
- Their riskiest assumption, and
- The MVP they’ll create to test it
Lead a discussion so the class can give them feedback to help them hone their MVP ideas.
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